SandRidge Could Move Higher From Additional Reserves

In this article, I will examine SandRidge Energy (SD) and compare it to several competitors in the energy sector. I will also explain where SandRidge is headed in the future (Hint: higher).

SandRidge Energy is based in Oklahoma, and recently traded around $8 a share. SandRidge stock has traded in a range of $5 to $13 a share over the past 52 weeks. The high was attained last summer, and corresponds to seasonal cycles and the run up of oil in the spring and summer when people in the United States drive more. Oil has steadily climbed to over $105 a barrel, so now is the time to get more oil to market.

SandRidge is using the higher prices to acquire more reserves and leverage funding for the company. SandRidge has increased the borrowing base of the company by a $750 million offering of senior notes. According to the company, these funds will go to pay for the acquisition of Dynamic Offshore Resources(DOR). This will give SandRidge more proven reserves and open up more shallow (less than 300 feet) depth oil leases and wells in the Gulf of Mexico.

ConocoPhillips (COP) recently used higher oil prices just like SandRidge to leverage more oil reserves and sale some big assets. For example, Conoco is spinning off Phillips and its retail outlets while SandRidge sold part of its reserves in Western Kansas for $1 billion. It's easier to make such large moves when cash flow is good and oil markets are up. ConocoPhillips, like SandRidge, added energy reserves at a joint venture in Australia. Both stocks for ConocoPhillips and SandRidge should go up some more because the price of oil has a chance to go higher before the summer driving ends. Although higher oil prices have helped oil companies. The higher prices have also made oil companies an easy target for politicians because their constituents are angry over high prices at the gas pump.

The Obama administration definitely has exploited the profits being made by oil companies from these higher prices. In fact, Obama tried to convince Congress to repeal the tax breaks for oil companies. Obama cited in a speech that Exxon Mobil (XOM) made $4.7 million per hour in profits and the three biggest oil companies made a combined $80 billion last year. The president does not think the oil companies need exploration tax breaks. The problem is, according to the Congressional Research Service, you could see higher gas pump prices and more foreign oil imports from the tax break being repealed. The tax breaks help with exploration costs. Therefore, companies might cut back exploration, which would keep oil from getting to market and raise prices. A large company like Exxon Mobil, with a market cap of $399 billion, could absorb the lost tax breaks; but smaller companies like SandRidge, with a market cap of $3 billion, could be hurt. Three billion dollars may sound like a lot, but drilling rigs, test wells, and other equipment are not cheap. SandRidge has to pay the same prices for oil testing equipment as Exxon Mobil. These facts seem to be lost by some members of Congress and the President.

Devon Energy (DVN) is another oil and gas competitor of SandRidge Energy. In fact, Devon drills in the same West Texas, Oklahoma, and the Gulf Coast areas that Sand Ridge drills. Devon Energy stock rebounded from its October lows and recently settled at 71.00. The Devon Energy stock chart is seasonal and corresponds with the United States annual transportation and driving periods. Devon, like Sand Ridge, went on a selling spree as oil prices rose. They got rid of $9 billion in Gulf of Mexico holdings and sold assets in Brazil in 2011 totaling over $3 billion. Devon has a lot a cash reserves; but unlike Sand Ridge, hasn't done any mergers and acquisitions recently. Devon is a more cautious company compared to Sand Ridge and moves much slower in acquiring companies. This sometimes causes investors to overlook Devon or even rate the stock lower than a company like Sand Ridge. Devon has overseas reserves that Sand Ridge doesn't have and more offshore holdings as well. Devon Energy's CEO, John Richels, said just last week Devon would not be buying any companies and would be putting more of its money into exploration. I like the extra cash, and I can live with slow and cautious. Devon Energy, in my opinion, isn't reacting to the investment crowd or bowing to pressure. Devon is thinking its moves through completely. Sand Ridge is still a good stock, but I like Devon more.

Chesapeake (CHK), a gas producer and supplier, doesn't have oil reserves and only drills for natural gas. Chesapeake isn't as versatile as Sand Ridge which explores for oil and gas. Currently, Chesapeake is having a tough time with depressed natural gas prices which SandRidge hasn't had to deal with as much. Chesapeake has been using new technology, such as the fracking method, to reach undrillable areas and remove the gas. However, some scientists have questioned the ecological cost and are doing studies to see if there's damage to the water supply. Chesapeake may have to rethink using this method of drilling depending on what studies show and also what our government decides to do. There may be problems with litigation later if the fracking is outlawed.

SandRidge may have similar liabilities with this method of drilling. SandRidge is in a better situation than Chesapeake because it has more streams of income from both oil and gas. Chesapeake's stock will stay under pressure until the gas market goes back up. SandRidge is my stock choice rather than Chesapeake for these reasons. So, where does SandRidge go in the future?

SandRidge will continue to pick up small companies that add value and make operational sense. SandRidge may be a candidate for a take over itself in the future because of its small market cap. The chance of takeover by a larger company goes down the bigger its market cap gets. SandRidge will also continue to add to oil and gas reserves and especially offshore Gulf of Mexico reserves.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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